Accounting

Principles
Second Canadian Edition
Weygandt · Kieso · Kimmel · Trenholm

Prepared by:
Carole Bowman, Sheridan College
 CHAPTER
11

CURRENT LIABILITIES
 ACCOUNTING FOR
CURRENT LIABILITIES

A current liability is a debt that can

reasonably be expected to be paid
1. from existing current assets or
in the creation of other
current liabilities and
2. within one year or the
operating cycle, whichever
is longer.
ACCOUNTING FOR CURRENT
LIABILITIES

 Types of liabilities
1) Definitely determinable
2) Estimated
3) Contingent
 ACCOUNTING FOR
CURRENT LIABILITIES

Definitely determinable current

liabilities include:
1. Operating line of credit
2. Accounts and notes payable
3. Sales tax payable
4. Payroll and employee benefits
5. Unearned revenues
6. Current maturities of
long-term debt
 OPERATING LINE OF CREDIT

 A pre-authorized demand loan, allowing the

company to write cheques up to a preset limit
when needed.
 Disclosed by footnote and by reporting
any resulting bank overdraft
as a current liability.
 NOTES PAYABLE
Notes Payable are obligations in the form of
written promissory notes that usually require
the borrower to pay interest.
Notes payable may be used instead of accounts
payable because it supplies documentation of the
obligation in case legal remedies are needed to
collect the debt.
Notes due for payment within one year
of the balance sheet date are usually
classified as current liabilities.
 SALES TAXES PAYABLE
 Sales tax is expressed as a stated percentage of
the sales price of goods sold to customers by a
retailer.
 Sales tax includes the goods and service tax
(GST), provincial sales tax (PST) or harmonized
sales taxes (GST and PST combined).
 The retailer (or selling company) collects the tax
from the customer when the sale occurs,
and periodically (usually monthly)
remits the collections to the government.
PAYROLL AND EMPLOYEE BENEFITS

 Salaries or wages payable represent the

amounts owed to employees for a pay period.
 Payroll withholdings include federal and
provincial income taxes, Canada Pension Plan
(CPP) contributions, and employment
insurance (EI) premiums.
 Employees may also voluntarily authorize
withholdings for charity, retirement, medical,
or other purposes.
 Payroll withholdings are remitted to
governmental taxing authorities.
 UNEARNED REVENUES
 Unearned Revenues (advances from customers)
occur when a company receives cash before a
service is rendered.
 Examples are when an airline sells a ticket for
future flights or when a lawyer receives legal fees
before work is done.
 CURRENT MATURITIES OF
LONG-TERM DEBT
 Another item classified as a current liability is
current maturities of long-term debt.
 Current maturities of long-term debt are often
identified on the balance sheet as long-term debt
due within one year.
 ESTIMATED LIABILTIES

 Obligation that exists but for which the

amount and timing is uncertain.
 However, the company can reasonably
estimate the liability.
 Examples include property taxes and
warranty liabilities.
 PROPERTY TAXES

 Property taxes are accrued monthly

based on the prior year’s tax bill.
 When the property tax bill for the
current year is received, the company
will adjust its monthly expense for the
remainder of the year.
 PRODUCT WARRANTIES

 Warranty contracts may lead to future

costs for replacement or repair of
defective units.
 Using prior experience with the product,
the company estimates what the cost of
servicing the warranty will be.
 Estimated warranty costs are accrued
with a debit to warranty expense and a
credit to estimated warranty liability.
 CONTINGENT LIABILITIES

 Contingent liabilities exist when there is

uncertainty about the outcome.
 Contingencies are accrued by a debit to
an expense account and a credit to a
liability account if both of the following
conditions are met:
1. The contingency is likely, and
2. The amount of the contingency can
be reasonably estimated.
 FINANCIAL STATEMENT
PRESENTATION
 Each major type of current liability is listed
separately.
 Often list bank loans, notes payable, and
accounts payable first, then other liabilities.

COMINCO LTD.
Current liabilities (Millions)
Bank loans and notes payable $ 5
Accounts payable and accrued liabilities 230
Income and resource taxes 36
Long-term debt due within one year 30
$301
APPENDIX 11A
INTERNAL CONTROLS FOR PAYROLL
 The objectives of internal accounting control
concerning payroll are
1. to safeguard company assets from
unauthorized payrolls and
2. to assure the accuracy and reliability of the
accounting records pertaining to payrolls.
 Payroll activities include:
1. hiring employees
2. timekeeping
3. preparing the payroll 4
Functions
4. paying the payroll of Payroll
 These functions should be assigned to
different departments or individuals.
 HIRING EMPLOYEES
The human resources department is responsible for:
1. Posting job openings
2. Screening and interviewing applicants
3. Hiring of employees
4. Authorizing changes in pay rates during
employment
5. Terminations of employment
 TIMEKEEPING
 Hourly employees are usually required to
record time worked by “punching” a time
clock – the time of arrival and departure are
automatically recorded by the employee when
he/she inserts a time card into the clock.
 The employee’s supervisor must:
1. approve the hours shown by signing the
time card at the end of the pay period
2. authorize any overtime hours for an
employee.
 PREPARING THE PAYROLL

The payroll department prepares the payroll

on the basis of two sources of input:
1. human resource department
authorizations, and
2. approved time cards.
 PAYING THE PAYROLL

The comptroller’s department is responsible

for the payment of the payroll.
1. Payment by direct deposit, or by
cheque, minimizes the risk of loss
from theft.
2. All direct deposit lists and cheques
must be signed by the comptroller and
their distribution protected by the
comptroller’s department.
 DETERMINING AND PAYING
THE PAYROLL

Determining the payroll involves calculating

1. gross earnings,
2. payroll deductions, and
3. net pay.
 GROSS EARNINGS
 Gross earnings is the total compensation
earned by an employee.
 There are three types of gross earnings:
1. wages
2. salaries
3. bonuses
 Total wages are determined by applying the
hourly rate of pay to the hours worked.
 Most companies are required to pay a
minimum of one and one-half times the regular
hourly rate for overtime work.
 PAYROLL DEDUCTIONS

 The difference between gross pay and the

amount actually received is attributable to
payroll deductions.
 Mandatory deductions consist of Canada
Pension Plan (CPP, or QPP in Quebec),
employment insurance (EI) and personal
income tax.
 PAYROLL DEDUCTIONS
 Voluntary deductions pertain to
withholdings for charitable causes,
retirement, and other purposes.
 All voluntary payroll deductions should be
authorized in writing by the employee.
 Voluntary payroll deductions do not result
in a payroll expense to the employer.
 Net pay is determined by subtracting
payroll deductions from gross earnings.
 EMPLOYER PAYROLL COSTS
 CPP
• The employer must match each employee’s CPP
contribution.
 EI
• The employer is required to contribute 1.4 times
each employee’s EI deductions.
 Workplace Health, Safety, and Compensation
• Employers pay a specified percentage of their
gross payroll to provide supplemental benefits
for workers who are injured or disabled in the
workplace.
 ADDITIONAL FRINGE BENEFITS
PAID ABSENCES

 Employees may have the right to receive

compensation for future benefits when
certain conditions of employment are met.
 The compensation may pertain to:
1. Paid vacation
2. Sick pay benefits
3. Paid holidays
 ADDITIONAL FRINGE BENEFITS
PAID ABSENCES

 When the payment of compensation is

probable and can reasonably be
determined, a liability should be accrued.
 When the amount can not be reasonably
estimated, the potential liability should be
disclosed.
 RECORDING THE PAYROLL
 Many companies use a payroll register to
accumulate the gross earnings, deductions, and
net pay by employee for each period.
 In some cases, this record is a journal or book
of original entry.
 The typical entry to record the employee costs
in a payroll is to debit Salaries or Wages
expense and to credit a variety of liability
accounts.
 When the payroll is paid, the liability
accounts are debited and Cash is credited.
 RECOGNIZING PAYROLL
EXPENSES AND LIABILITIES
GENERAL JOURNAL
DateDate AccountTitles
Account titlesand
andExplanation
explanation Debit Credit
Debit Credit
June 15 Office Salaries Expense 5,200.00
Wages Expense 12,010.00
CPP Payable 654.03
EI Payable 387.23
Income Tax Payable 5,646.90
United Way Payable 421.50
Union Dues Payable 215.00
Salaries and Wages Payable 9,885.34
To record payroll for the week ending
June 15.

Academy Company records its payroll for the week ending June 15, 2002 with
the journal entry above. Office Salaries Expense ($5,200) and Wages Payable
($12,010) are debited in total for $17,210 in gross earnings. Specific liability
accounts are credited for the deductions made during the pay period. Salaries
and Wages Payable is credited for $9,885.34 in net earnings.
 RECORDING EMPLOYER
PAYROLL COSTS
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit

June 15 Employee Benefits Expense 2,056.65

CPP Payable 654.03
EI Payable 542.12
Workers’ Compensation Payable 172.10
Vacation Pay Payable 688.40
To record employer payroll costs on
June 15 payroll.

The entry to record the payroll costs associated with the Academy Company
payroll results in a debit to Employee Benefits Expense for $2,056.65, a credit to
CPP Payable for $654.03 ($654.03 x 1) and a credit to EI Payable for $542.12
($387.23 x 1.4). Assuming a worker’s compensation rate of 1 percent, the comp-
ensation payable liability would be for $172.10 ($17,210 x 1%). Vacation pay
accrues at 4% and therefore the vacation payable will be 688.40 ($17,210 x 4%).
 RECORDING PAYMENT
OF THE PAYROLL

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

June 15 Salaries and Wages Payable 9,885.34

Cash 9,885.34
To record payment of payroll.

The entry to record payment of the Academy

Company payroll is a debit to Salaries and
Wages Payable and a credit to Cash.
 COPYRIGHT

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